2. 8
1 As the consumer food industry stagnated,
McDonalds had to look for alternative avenues of
growth
When the world consumer food
industry was volatile… … McDonalds had an existing pilot
Consumer foodservice value growth in project to provide a possible source of
% growth
World McCafe was first introduced in Melbourne,
North America 8 Australia in 1993
Western Europe
Early outlets with McCafe reported 15%
4 4 more revenues than the normal McDonalds
3 3 outlets
1 By 2001, McDonalds expanded to 300 stores
worldwide
5
-1 McDonalds introduced McCafe as a product
line across in stores in the US
-3
By 2008, McDonalds increased McCafe
stores worldwide to 1,300
Further expansions planned worldwide. In
-9 2011 McDonalds Canada announced
1999 2000 2001 intentions of opening a McCafe in every
outlet
Source: Euromonitor, McDonalds Annual Reports 2
3. ,
1 The coffee market is an attractive market with
growth potential and good returns
World-wide coffee market increased with Gross margin for coffee players is 51% on
2% p.a. average
Million bags of coffee Gross margin in percent
58 Starbucks
Caribou Coffee
56
132 54
132
130
130 52
Ø 51
128 127 50
126 +2%
48
124 123
122 5 46
120 119 119 44
118
42
116
114 113 4
112 111
2
110 109
0 0
2001 02 2003 04 2005 06 2007 08 2009 2002 2004 2006 2008 2010 2012
Source: www.ico.org 3
4. 46
1 The specialty coffee industry is characterized by
low threats despite competitive rivalry
Threat of Substitutes - Low
Drink with addictive character:
2.25 billion cups/day consumed
Substitute are tea, juices,
energy drinks and milkshakes
Culturally part of daily routine
Suppliers Bargaining Power Bargaining Power of Buyers
- Low - Low
25 million small producers of Competition - High Fragmented buyers
coffee beans Monopolistic Taste preferences and brand
Many providers of roasting Price, quality and loyalty are important drivers
facilities Multiple customer profiles
scale matters
Premium demanded for including convenience, price
quality and organic products sensitive and connoisseur
Threat of New Entrants - Medium Traditional
Single store cafe’s have very Complements
limited barriers to entry Merchandise – coffee
Specialty coffee chains need cups, mugs, T- Shirts etc.
scale and thus high capex Cookies, donuts and short
for prime locations eats
Source: World Development Vol. 30, No. 7, pp. 1099–1122, 2002 4
5. ,
2 McDonald’s can surpass Starbucks as the largest
coffee retailer by bringing McCafe to ~50% of its
stores
McDonalds has two times the stores of Starbucks
Thousands of stores world-wide Competitive advantage
35 McDonalds’ size allows it to
cover Starbucks’ retail
30 McDonalds network at a lower cost:
Installing McCafe’s in 50%
25 of the McD stores will
make the retail network
20 larger than Starbucks
Starbucks McCafe capex is one third
15 of Starbucks capex (USD
315k)
10 Dunkin’ McDonalds has 20% more
Corp1
cash (USD 2.5bn) than
5 Starbucks (USD 2.0bn) on
balance sheet to expand
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
1 Dunkin’ Corp is the parent company of Dunkin’ Donuts and Baskin Robbins (icecream)
Source: McDonald’s balance sheet 9/30/2011; Starbucks balance sheet 01/01/2012; McDonalds annual report 2009 5
6. 2 McDonalds’ strong capabilities allowed it to roll
out a coffee retail chain with less effort than
competitors
Infrastructure Broad retail network - 32k stores, translates into capabilities to scale up fast
at lower costs (McCafe costs 1/3 of the USD 315K spent for a Starbucks
store)
HR High quality training programs to quickly re-train employees for new roles
Technical Proven experience in developing products that fit with customer taste,
Development ability to standardize products and operations on world-wide scale
Operations and Logistics Marketing & Sales Services
Guaranteed access to quality Established regional Ability to draw on its
supplies due to exclusive and marketing strategy and experience in fast
long-term contracts with suppliers media relations would food to have faster
such as Kraft result in a effective and service times for
quick campaign for new McCafe products
Existing supply chain network
products
can be easily leveraged to better Can reach a wider
integrate and roll out new product Strong brand recognition customer
lines faster drives traffic and quick base through
adoption and increase of drive-through stores
Franchised operations make it
sales of new product and longer opening
easier to increase stores with
lines hours
lower capital expenditure
Source: McDonalds 2010 Annual Report, Business Week 6
7. 1%
3 McCafe has lower prices than Dunkin’ Donuts and
Starbucks, and McDonalds overall has lower
COGS
Price of a medium latte coffee in Orange Cost of Goods Sold as percentage of sales 1
County
Percent of sales in 2011
USD in 2011
McCafe 2.89 23%
Dunkin’ 3.00 -0.36 20% -28
Donuts
Starbucks 3.25 51%
To increase demand for its McCafe products, McDonalds and DD have lower COGS than Starbucks
McDonalds priced its products below competitors Less costly raw materials (less specialized coffee)
Smaller assortment of exotic coffees
1 COGS based on COGS / sales from company financials; for McCafe: (paper + food) / sales
Source: Analyst Reports; Industry Reports; Company; Company Financials 7
8. 3 Introducing McCafe increased McDonalds menu
range and enabled it to access a broader
customer base
Premium – Up Scale The positioning rationale
By introducing McCafe,
The Coffee Bean McDonalds is able to broaden the
& Tea Leaf base of their target customer
whilst sticking to their price
Starbucks
segment
McDonalds broadened its menu
Dunkin’ YUM! Brands
Limited Broad range to keep the customer
Donuts McDonalds longer in the store and spread the
Menu Menu
Range McDonalds + McCafe Range visits more evenly over the day
Burger King Main competitors - Dunkin
Donuts and Starbucks – differ
Wendy’s substantially in price
YUM! has the broadest menu
range, but divided over multiple
brands (Pizza Hut, KFC, Taco
Bell). Thus, McDonalds has the
No Frills – Low End advantage of a unique brand
across all its products
Source: Company websites 8
9. 3 McDonalds is close to the leading edge of the
productivity frontier; Dunkin is more differentiated
Fast-food
Differentiation
Gross profit / sales1 Coffee to go
Drivers of Differentiation
Coffee retail
100
Second Cup increased gross margin by
The Second Cup
90 increasing same-store sales with more than 30
different premium coffees
80 Wendy’s has lowest opex mostly because it
Dunkin’ Corp
has consolidated overhead in one center
70 YUM! Brands
Dunkin’ Corp is more differentiated
60 because it has:
Caribou Coffee Company A broad geographic distribution of its
50 ~10k points of sale
Peet’s Cofee and Tea A mix of value and premium items
Starbucks McDonalds A high willingness-to-pay for coffee to go
40 Kraft Foods High margins and low COGS on donuts
Burger King McDonalds 2001
30 Sara Lee YUM! drives up WTP by having:
Multiple brands (KFC, Taco Bell, Pizza
20 Wendy’s Hut)
Large scale (35k retail stores)
10
McDonalds benefits from:
Large-scale purchasing capabilities
0
Broad geographic coverage
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Introduction of new product lines
1 All data 2011 averages, except for Burger Opex turnover
King 2010 gross profit / sales (1/(opex/sales) 1
Source: Google Finance; Thomson One; Company Financials; Analyst Reports 9
10. 4 McDonalds adapted the McCafe concept to
incorporate a lounge store-in-store concept…
GERMAN
EXAMPLE
Factors United States Germany
Annual to go coffee 100 liters/person 150 liters/person
Market consumption
factors
Market phase Young market Developed
#1 Competitor Starbucks Tchibo
Product positioning McCafe drinks as product Store-in-Store concept
extension
Adap- Distribution Drive-through Lounge area in McD store
tation Example product Extra Large Soy Latté Groß Milchkaffe
Target customers Transit Young, social
Photos
Source: Euromarket International 2010; Euromarket International 2011 10
11. 4 …and its scale and established local operations
gave McCafe a competitive advantage GERMAN
EXAMPLE
McDonalds’ resources Advantages for McCafe
Large retail presence – 1,415 stores Easy to roll out McCafe stores – 764
Scale Significant market share – 27% stores currently
Tap existing customers with McCafe
Long market presence – 41 years Knowledge of taste preferences
Learning Tested concept in a German-speaking
Austria served as a test market
country
Production/ Established supply chain Easier to push new product
Sourcing extensions to (franchised) stores
Remodeling existing stores to Capital expenditure is a third of
Design incorporate store-in-store concept Starbucks (USD 315k)
Strong supplier relationships
Strong supplier relationships
Cost Franchised set up leads to lower
81% of stores franchised
capex costs for McDonalds group
Existing stores remodeled Increased sales per square foot
Utilization Training of existing employee base Pooling leads to higher utilization
Fast-food production efficiencies Waiting time 32% below Starbucks
Efficiencies
Standardized practices Easy to introduce new products
Source: “unternehmen” www.mccafe.de 01 March 2012 “McDonalds.”Euromarket International. August 2011 11
12. 600
5 Since its introduction in 2006, McCafe has grown
rapidly in number of stores and revenues GERMAN
EXAMPLE
McCafe store-in-stores grew 37% p.a. McCafe revenues grew 13% p.a.
Number of German McCafe store-in-stores 1 Revenues in EUR million
600 +13% 578
800 764 545
740 550
+37%
700 500 462
600 450
540 402
400
500 5 350
400 300
293 250
300
200
214
200 150
100
100
50
0 0
2006 2007 2008 2009 2010 2007 2008 2009 2010
1 2007 and 2009 estimated based for 2006-2010 CAGR
1 Only yearly data available on Caribou Coffee: yearly sales uniformly distributed over quarters
Source: Euromonitor 2011 12
13. ,
5 The launch of McCafe boosted stock performance
above competitors and decreased sales variance
McDonalds’ stock price increased with 30% p.a. after …while decreasing the variance of
McCafe introduction vs 20% p.a. for Starbucks and sales growth
outperformed YUM! Brands at growth of 16% p.a.
QoQ sales growth 2001-2006
USD standard deviation in percent
110 Starbucks
McDonalds
100
YUM! Brands McDonalds 5
90
80
70
60 Starbucks 7
50
40 +30% 16%
30 20%
20 YUM! Brands 21
10
0
1998 2000 2002 2004 2006 2008 2010 2012
1 Only yearly data available for Caribou Coffee: yearly sales uniformly distributed over quarters
Source: Thomson One; Company Financials 13
14. 6 The dominant strategy is to maintain current price
status quo to increase industry profitability
Starbucks maintains Starbucks reacts
The current status quo has a Starbucks could probably react by reducing
price differential between prices equal to McDonalds
Starbucks and McCafe of 36 USD This would take the price sensitive customer
cents or 11%
McDonalds
back to Starbucks as it enjoys the perception
maintains
Gross margin of McDonalds and of providing premium coffee
Starbucks are similar at around We believe that this scenario is unlikely as
45% McDonalds has the gross margin
leverage and complementary revenue
streams to react
If Starbucks were to reduce prices,
McDonalds reacts
McDonalds has already positioned
itself as the lower-cost option and McDonalds will react to ensure that the
will not react without a Starbucks price differential is maintained
reaction This outcome will not impact customer
Unlikely that McDonalds will patterns largely but may have some impact
reduce prices if Starbucks maintains on overall coffee consumers
as it will not bring them any further We believe this will lead to lower industry
benefit
profits as the rest will have to follow suit
Source: Team A2 analysis 14
15. 6 Establish a core McCafe product and develop at-
home coffee solutions to mitigate competitor’s
actions
Competitor’s actions Impact on McDonalds Mitigation measures
The Starbucks and Dunkin The broad menu range
Donuts challenge in main distinction of nsure that core
stream fast foods. McDonalds will be competency in food is
Main diluted if the competition sustained with a strong
stream Bacon and Gouda moves towards a similar focus on healthier
and Artisan S/W product extension options
product Starbucks strategy
extension
Starbucks and Dunkin evelop campaigns to
Emulation by Burger King, Donuts already have a establish a core McCafe
Wendy’s, Pizza Hut etc. presence in hot breakfast coffee product which is
meals. as associable as the Big
Mac (Frappucino for
The Dunkin Donuts and At-home coffee Starbucks)
Starbucks push towards at- solutions (beans, K-
home coffee (beans, Cups) is aimed at getting
powder, K-Cups) the customer accustomed evelop and market at-
At-home to a particular blend and home coffee solutions
products thereby increasing the such as McCafe K-Cups
resistance to change. and coffee blends to
develop customer tastes
and build brand loyalty
Source: Team A2 analysis 15
16. 7 McDonalds should increase its profits by
expanding the McCafe concept
A Roll-out more McCafe store-in-store concepts worldwide
Store-in-store increased sales with 15% in Australia
Need to increase time spent in store per customer and sales per customer
Decrease variance in sales overall and throughout the day
B Introduce McCafe at home products
Develop a McCafe taste which increases store-visits and same-store-sales
Increase revenue stream by adding a product line
Increase the brand recognition of McDonalds as a coffee producer
C Develop healthy complementary products for McCafe
Drive up sales per customer
Attract a different segment to McCafe because of its more healthier positioning
Source: Team A2 analysis 16
DR: - the food market in 1999-2001 was very volatile McD looked for alternatives McD had already a good coffee extension in Australia 2011 announcement: in Canada in all stores Foodservice definition: TBD
DR In 2011: this market was USD 71bn retail value of coffee Even when the economy was stagnating / we are in a recession: coffee market still grew
DR: overall low threats: example:drink is addictive, part of culture, many suppliers, buyers are fragmented and new chain entrants would need large capex But high competitive rivarly as there are many players: few big ones, many small ones
DR McD is large If they want to compete: 50% of stores, 1/3 of capex, 20% more cash than largest player
DR Key capabilities: high quality training programs, know local markets + can run effective local marketing campaign, proven experience in developing products that fit with customer taste + we can standardize the roll-out / production world-wide Thats why they can roll out with far less effort than anyone else
VR How did they enter the market: Cheaper than DD and SB (general trend) We can infer also lower COGS position than SB -> thus cost player: able to pull of lower prices with good margins
VR New product line: menu range became broaders Furthermore, McCafe SiS are designed more premium than standard McDonalds + product range is more premium
VR This translate into: more differentiated + more efficient (opex turnover increased) Two examples: second cup + Wendy’s McDonalds moves to the right because the revenues they generate from McCafe grow faster than the incremental opex
DR - In
DR
DR In 2008: about 1,300 McCafe’s worldwide, this means 40% in Germany
DR: decreasing variance of sales growth because: Coffee + complements sales are more spread out over the day Lower value items can target a larger segment Customers buy more complements